Mervyn King has to write a letter to the chancellor explaining why inflation is above target. Photograph: PA Wire/PA

Mervyn King, the governor of the Bank of England, was forced to write an explanatory letter to the chancellor today, after official figures showed that inflation shot up to 3.5% last month - well above the government's 2% target.

When inflation rises more than 1% above the ceiling set by Alistair Darling, the governor must write and explain why the Bank's nine-member monetary policy committee has allowed it to jump.

In his letter to the chancellor, published this morning, King singled out the restoration of VAT to 17.5%, higher petrol prices and the knock-on effects of the depreciation in the pound as the major contributors to last month's rise.

However, the governor insisted that inflation was "more likely than not" to fall back to its 2% target in the second half of this year, and then move below it, as the slack in the recession-hit economy makes it difficult for retailers to push up prices, or workers to win bumper pay rises.

"The direct effect of the short-run factors on inflation should be only temporary," King said, arguing that in the longer term, weak demand would "bear down on inflationary pressures".

He said the MPC stood ready either to restart its £200bn policy of quantitative easing - pumping money into the economy - or to tighten monetary policy, if it proves necessary in the coming months.

"With the world economy emerging from the deepest downturn in modern times, the inflation outlook remains subject to some uncertainty," wrote Darling. "But prospects for the UK and the global economy are better than 12 months ago as governments across the world have stepped in to support their economies."

A 14-month high

The 3.5% reading is the highest for 14 months, and a large increase from December's 2.9%; but the numbers have been distorted by the return of VAT to 17.5%, after the year-long emergency cut made to battle recession.

Howard Archer of analysts Global Insight said the spike in inflation was likely to be temporary. "Consumer price inflation could rise further in February as more retailers pass on January's VAT hike. However, that may well mark the peak and inflation should start to fall back in the second quarter," he said. "Underlying prices pressures should be contained by substantial excess capacity, muted recovery, wage moderation and the need for retailers to price competitively in the face of still limited consumer spending."

As well as the increase in VAT, statisticians said the higher cost of crude oil had driven up petrol and other transport prices over the past 12 months, and the price of new and second-hand cars had also risen in January. On the broader RPI measure, inflation was 3.7% in January, up from 2.4% in December.

About this article

Inflation soars to 3.5%

This article was published on
the Guardian website
at 05.59 EST on Tuesday 16 February 2010.
It was last modified at 15.01 EDT on Wednesday 11 June 2014.
It was first published at 05.05 EST on Tuesday 16 February 2010.